Annual Meeting of the Host Country Committee on Carbon Finance

Washington D.C. February 15-16, 2005

www.CarbonFinance.org

The World Bank Carbon Funds:

Buyers Perspective

What buyers want…

• Purchase CERs preferably valid under EU ETS no sinks, limitation on hydro

• No post 2012 vintage of CERs• Typically fixed price contracts• Payment on delivery of CERs

• Limited upfront payments usually on a case-by-case basis for most public sector/ multilateral funds

• Currency: mostly in $ till now, shifting to € • Low counterparty (seller) risk

– Sound equity investors in the project– Lending by reputable commercial banks– Solid off-take agreements for the underlying product, e.g. power

purchase agreement

• Preference for projects close to financial closure

What buyers want (2)…

• Penalty for under-delivery• Most carbon funds (all World Bank funds, KfW fund, Japan

Carbon Fund) have no penalty• Private sector buyers and brokers pay premium for delivery

guarantee

• Over-collateralization to manage under-delivery risk• World Bank carbon funds < 80% of the expected ERs; KfW fund

< 50%, etc.• Over-collateralization and Unilateral CDM

• The ability of host country entities to hold CERs in the CDM Registry account of the host country and sell subsequent to initial issuance

• Inability to do this prohibits• Project sponsors from profiting from price increase in the future • Private sector in the host country to enter in to brokering• Private sector in host country from intermediating and speculating

What buyers want (3)…

• Most carbon funds look for country and technology diversification for risk management– Most buyers have regional preferences

• Size of transactions• Minimum

• in CDCF about 30,000 TCO2e/year• Other funds not less than $3 million of ER purchase• Over 100,000TCO2e/year desirable

• Maximum of about $20 million

• Low country risk• KP ratification status, DNA, CDM approval process• Host country approval of a project

Key Lessons …

• Enabling policy environment helps– CDM strategy development is only a first step.

Learning by doing (i.e. projects) is the way forward.– Successful CDM projects require a minimum

national framework (legal & institutional).

• Key prerequisites for successful projects:– Project makes basic business sense– Project sponsor / owner commitment– Project reasonably well prepared (feasibility study,

underlying finance)– Host country commitment

Local Regulatory and Business Environment…

CDM/ JI is a competitive market To attract investments in CDM /JI countries, private

sector more likely to invest if host country has: – Clear and consistent approach to sustainable development – Clear procedures for project approval (or refusal!) with specific

timelines– Single window approach: DNA to assist project proponents in

complying with all applicable laws, including those regarding environmental impact assessment

Above all, approving a project under the CDM/JI should be transparent and predictable and within clearly stipulated time-frame

What works and what doesn’t…

Local (Financial) Intermediaries help to– Identify project opportunities at lower cost– Get equity and debt financing – More effectively design and/or evaluate projects– Reduce transaction costs

Insufficient project preparation doesn’t help...– Underlying projects must be well prepared (feasibility

study, risk assessment, financing).– Committed project equity partners – The project must be viable business proposition. – The sector must be competitive if a project is to be

viable.

In conclusion…

• Things that help:– Enabling policy and environment (including a effective

DNA and simple approval procedures)– Experienced and committed project sponsors– Mature project idea prepared competently– Domestic credit market liquidity and ability to take

informed risks– Local financial institution as intermediaries

• Things that don’t help– Projects at very early stage of development– Projects that don’t make business sense– Projects that are inconsistent with

• Sector development goals• Environmental, social and other policies